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EU adopts flexible stance on bank crises

Section: Daily Dispatches

By Tony Barber
Financial Times, London
Sunday, September 16, 2007

PORTO, Portugal -- European Union finance ministers and central bankers decided at the weekend against establishing fixed rules in advance on how to bail out banks or other financial institutions that have cross-border operations in the EU.

The ministers and bankers agreed to adopt common principles for managing cross-border financial crises but left unanswered the question of how, if at all, the governments and taxpayers of different EU member-states should share the cost of rescuing a bank active in many countries.

EU officials are devoting great attention to the issue because of the risk that the continuing liquidity squeeze in world financial markets may cause a crisis at a cross-border financial institution similar to the one that last week struck Northern Rock, the UK bank and mortgage lender. According to a committee of EU finance ministry and central bank officials, there are 46 cross-border banking groups in the EU, and 21 of those have significant operations outside their home country.

Jean-Claude Trichet, the European Central Bank president, was among those who argued at the weekend meeting of ministers and central bankers here that it would be wrong to be inflexible and fix rules in advance for cross-border bailouts.

"We encourage intimate co-operation between all banking authorities. We also insist on flexibility. Flexibility is really of the essence," Mr Trichet said.

He praised the decision to adopt common principles for crisis management, saying: "The agreement is acceptable for us because it does not comprehend an ex-ante burden-sharing concept."

EU officials said the crisis at Northern Rock had taken ministers and central bankers by surprise and had served as a sharp reminder that the EU would have no instant solutions if a pan-European financial institution were to fail.

Charlie McCreevy, the EU's commissioner for the internal market and an expert on financial regulation, acknowledged that the EU needed to address in more depth the question of who should bear the burden of a bank rescue.

"We are making progress, but I would not want to put it any stronger than that," he said. "We are moving to the next stage. You can only move as fast as you are allowed."

The European Commission said last month that a simulation exercise conducted last year had led to the conclusion that it was difficult to decide who should bear the cost of a bailout.

Fernando Teixeira dos Santos, the finance minister of Portugal, which holds the EU presidency, said: "Growing market integration in the EU constitutes a factor for financial stability because a broader and more diversified financial system is better able to absorb potential shocks and to prevent them. Nonetheless, the growing number of institutions operating across borders also faces us with new financial stability challenges."

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